Bank Nationalization: A Viewer’s Guide

At the end of last week, Senators Dodd and Schumer signalled that financial elite solidarity has broken; “nationalization” is no longer taboo. The consensus is dead (check with Barney Frank), crazy ideas abound, and long live what new policy approach? Here’s five sets of issues to guide your viewing this week as we slip and slide sideways into our future.

1. The White House and Treasury have fallen behind events. When and how do they try to regain control of the situation? Is there a relatively early and decisive move up their sleeves? This seems difficult, as they have committed to doing stress tests first and foremost, and presumably any meaningful tests take at least a week (probably they were intended, when announced, to buy more than a month). But these are resourceful and imaginative people, with lots of connections and some big friends to save, and they fully understand the importance of retaking the initiative. Watch for a major announcement Sunday – always good to act before the Tokyo market opens – or early in the week.

2. The strategy alluded by the Senators is: the devil take the hindmost. This implies two big banks are in the line of fire; both, of course, are strenuously denyingthat anything of the kind is true (we could call this the Irish Ministry of Finance line; it also worked for Northern Rock and Iceland, at least for a while). But the banking system problems are likely to be much deeper, and any attempt to deal with just two banks is likely to founder fairly quickly. Probably our financial leadership will for now dig in around “two and only two,” but when the consensus is so fragmented, anything can happen. Follow the public statements of Lloyd Blankfein closely; use the hubris in his February 8th, 2009, Financial Times op edas a benchmark (remember: this was timed to appear upstage on the morning Secretary Geithner was supposed to present his financial system plan).

3. How does the designated government leadership communicate that credit probably needs to contract for all banks, including anything taken over by the government, given the declining willingness to borrow by creditworthy individuals and firms? Some of the language used in and around the House Financial Services Committee hearing with bankers demonstrated a worrying misperception – just because banks are taken over does not mean they should, could, or would increase lending. If we get a substantial increase in government directed credit, our problems will get much worse before, if ever, they get better. This is definitely a media blitz assignment for senior political nominees at Treasury. Will we learn more of their names this week?

4. There is no panacea, and that includes taking over banks. We face a pervasive global confidence problem for consumers, firms and – in some countries – governments. The government takeover of failed banks with systemic importance is the worst of all possible strategies, apart from all the alternatives. Decisive action on the banking system is necessary but not sufficient for the economic recovery. Will this message be communicated clearly by the architects of the bank strategy, to keep expectations at reasonable levels? Could someone, please, have a word with the official forecasters (yes, I’m looking at the Federal Reserve). It is hard to focus the world (and Congress) on forestalling Financial Armageddon when your crack modellers publicly predict something close to a V-shaped recovery near the end of the forecast horizon.

5. Will there be a clear, upfront commitment to reprivatization, with a promise that large banks will be broken up in the process? Changing the industrial structure of banking is essential for altering the political economy of the sector. Community bankers – influential in the Senate – need to be brought onside with aggressive FDIC-type interventions, and this is more likely to happen if they sense that that the era of megabanks is drawing to a close (the dinosaurs are finished; someone notify the mammals). Watch also for supportive body language among private equity investors. If the banking lobby breaks into small pieces, politics could become a lot more interesting.

40 responses to “Bank Nationalization: A Viewer’s Guide”

The question is not whether we nationalize the banks or not. Ownership makes no difference on the solvency of the bank. The question is how much capital will the banks need in the near future and who is going to provide it. Notice that if a bank needs a large amount of capital relative to it’s current book value, current stockholders are going to be diluted whether that capital comes from private or public sources.

What the proponents of nationalization hope to accomplish is to reassure the markets that the public sector will provide as much capital as the banks need until the current crisis passes. I, personally, am opposed to having taxpayers write blank checks; other people, especially abroad, feel freer to spend the American taxpayer dollars.

A monkey trainer was giving out acorns and he said, “In the morning I will give you each three acorns and in the evening you will get four.” The monkeys were very upset at this so he said, “All right, all right, in the morning you will get four and in the evening, three.” This pleased the monkeys no end.

The general publics breadth of knowledge comes from what is aired on CNBC. If they say bank crisis, the media and talking heads focus solely on nationalization and equity reaction. Equity is gone folks, give up the ghost.

Bond holders must face the reality that they are going to take a haircut one way or another.
Until now, all banks have been bought or hastily merged to prevent full liquidation, even Lehman. Imagine the carnage in the bond market if just one of these banks went into liquidation. I mean full scale shut the doors, pay the depositors and sell, Mortimer, sell. Bond holders would get pennies on the dollar in a true fire sale.

Doing so will be horribly painful, but the FDIC/FED/Treasury needs to show bond players the downside. The economy is already in a frothy guano brew with no end in sight. A little shock therapy might get the bond holders to take a haircut and banks can mark these assets down to their true value….in many cases ZERO. So wipe out existing equity, convert some/most debt to equity, and mark down these assets. NOW.

Team Obama needs to fight things head on, so its time to start using Bush’s greatest legacy. Here is my PR campaign: “A weak and faltering banking system emboldens the terrorists.” “Shotty banks lead to higher taxes” “Ken Lewis is anti-military” “Citi is in bed with Bin Laden” You have to win over the idiots watching CNBC, as sad as that is.

Make no mistake this is social problem. And by “social” I mean the kind where the Treasury Secretary’s wife is good friends with the wife of CEO of Bank A, where they attended the same elite Ivy League schools and pledged the same fraternities, where sons and daughters intermarry, where they patronize the same country clubs…

You get the idea. The good ol’ boys club.

Few things have a more powerful effect on decision-making than doing what you feel is right for your close friends. It is human nature, the essence of our tribal being that has served us well 100,000 years before civilization proper much less modern banking. Combine this ancient social drive with an extraordinary amount of wealth that comes with shaping the nation’s money supply and you have one close knit and very rich network—one that has fully integrated itself with the very government that regulates it.

The FDIC can take over a bank. Any bank, just like that. All it takes is the Treasury Secretary’s order. That’s “nationalization” and its going on right now on a weekly basis. The toxic assets are themselves can be wiped away like an accounting rule and recapitalized with the magic of borrowed reserves. The chips then fall where they may, and depositors need not lose a single dollar. It’s all digital funny money at this point.

But we all know what that involves. In order to tell the market that this is still a real game with real consequences, the bank shareholders must be wiped out first and the executives fired. Anything else is a blatant transfer of wealth, or bending the rules beyond all repair.

That is why we have these word and accounting games which avoid the issue, if not outright attempt to hide what’s really under the shell. The tribe simply cannot afford to wipe out some of its own at the very top. They all know how quickly the network can unravel from there.

Finally, there is a real personal fear underlying failure. Shame. Disgrace. Exposure. Safety. There absolutely would be repercussions of the Kenneth Lay kind. But that is what it is going to take to break this crony club: criminal investigations and prosecutions, because they will not go willingly. And they are not the type that honorably fall on their sword.

The bankers have only one card left to play: the fear of socialism. The idea of government running Citi or BofA should give anyone pause, particularly if he has ever attempted using the post office (not the letter box, I mean going inside and dealing with the staff). The only sensible solution would involve creating more and smaller banks, outlawing derivative bets, restoring Glass Stegal, taking banks out of the trading business and returning them to lending. That will not address what is called the systemic problem: which really boils down to preserving all the corporate debt and bank debt which has piled up while the celebrity plutocrats played russian roulette with fiat money. Can we afford to let the debt disappear in bankruptcy? Who loses if that happens? Is there any way left to prevent it? The next few months will be a test of who Obama really represents. Is he another Clinton, talking populism but standing up for financial interests? The class standing to lose in this mess is the creditor class. Waxing sentimental about foreclosed mortgages is a phony issue. Those subprime borrowers never had any equity; those mortgages will have to be reneogiated because the lenders beyond the top tranche will not realize anything in foreclosure. The only question is political: whether the incumbent bankers will retain power.

StatsGuy must be exhausted; I would not be at all surprised. He finally wrote something that I cannot appraise with the customary six Huzzah!’s.

I’m not satisfied that the bank show is not still in the main ring. Nor do I think that all methods of dealing with it are equal in long or near term economic effects, as Rajesh and others seem to imply.

The potential size of the lug against the public imposed by the “need” to assist banks in clearing their balance sheets of “hard to value assets” which if written down to their market value make the banks insolvent impacts too heavily and negatively on the ability of the government to take other needed action, to be considered other than front and center.

Since so great a part of these HTVAs were were originated as an intrinsic part of a system, the creation and operation of which the banks aided, abetted, and benefited from, it is both inappropriate and potentially destructive of civic comity and accord to contemplate transferring responsibility for covering the resulting losses to the public.

The problem goes far beyond “finding a market value” for these assets – the entire assemblage must be unwound, to the degree necessary that the fraud affecting its component parts can be teased out, prosecuted, and the instruments affected removed from the aggregate or purged of the effects of the original impropriety. Until that process is done, the entirety is essentially worthless, and potentially a very large obligation – which should not be transferred to the taxpayer before ensuring that any gains which have been realized from these actions have been or will be subject to disgorgement.

The goal motivating policy concerns and initiatives to restore the banking system is to place it on a footing that will permit it to, and cause it to resume normal financial – especially lending – activity. That is a necessary and commendable objective – but the process used to accomplish it should not be one which “launders” the bank’s principals or its assets to such a degree that they become exempt from prosecution, disgorgement, or further liability resulting from their actions in the creation of financial instruments containing elements originated in fraud – especially when that laundering is accomplished by transferring the instruments in question to the American public.

I would like to see an objective presentation of the facts. They are very complex and hard to fully understand. For example, “Bank” lending has continuous increased throughout this credit crisis. But credit has become harder to find. “Bank” stocks have dropped like a stone despite huge stimulants. These are counter-intuitive findings that require a better descripton of the facts. This includes information about non-banks and their relationship to banks. I suspect much of the outrage directed at banks would be better directed at the non-banks.

National banks can, and do, lend when private banks won’t. National banks can be an important financial/ stimulus tool during critical times of need. Like now.

To baldly assume leadership of a National bank would be clueless, is clueless. Nationalisation is the cleanest, cheapest way to begin healing our financial system.

The government has no obligation, when sequestering illiquid assets from insolvent bank balance sheets, to pay anyone anything. In fact, doing so is a huge favor for creditors because the government can simply refuse to sell these assets into a recessionary whirlwind where rational pricing has disappeared. Government can, and should, refuse to participate in fire sale dismemberment of assets. Doing this guarantees that creditors will gain better pricing of their securities.

Sequestration will result in smaller balance sheets. If additional capital is deemed necessary for the resulting, now National bank, then it will be taxpaper paying taxpayer when new capital is committed: Not taxpayer paying creditor.

Equity is wiped out, of course. The market has already wiped the value out already. The day traders who have been beating each other up daily will simply move on: the shorts with the final victory, the longs with a chance to win the next battle.

“We should resist a response, however, that is solely designed around protecting us from the 100-year storm.” according to Lloyd Blankfein at Goldman. Nonsense. We should embrace this response. What will Mr. Blankfein comment when we are caught with legacy infrastructures and the oil is shut off or becomes hugely expensive? “Ooops. There’s another one of those 100 year thingies.”

The two things to keep in mind about the randomness of risk is that large, complicated systems will exponentially increase the damage creatd by surprises, and that surprises can come one right after another. Re-read Mr. Blankfein’s article and ask yourself whether or not he is describing a complicated system.

Regardless of any to-be-determined policy, the ‘stress test’ AKA ‘government audit’, is prerequisite.

No one can quantify the ‘banking problem’ without it.

This means that the institutions in question will no longer be able to hide their liabilities and there will be inevitable consequences, many of them negative, for management and shareholders and justifiably so.

The public no longer buys Paulson’s argument that “if we get credit flowing the economy will follow.” And because the public does not believe it, it’s not true.

We are not living in Japan in 1990s with an export led economy. Banks are important, but any attempt to assume full responsibility for bank liabilities (either through nationalization or any other sleight of hand) will result in crippling debt.

And it will not fix the economy. It will engender massively complicated and slow govt. intervention, will dominate the attention of an impatient and disgusted public for years, will exhaust Obama’s political capital, and will leave the US taxpayer with crippling debt even as our income (tax revenue) is declining.

This is not (just) about the banks. The WHOLE ECONOMY is in debt. Way too much debt – public and private. Debt incurred by our parents that did not result in productive investment, and we and our children are paying it – even as our economy crumbles and entitlements rise.

There is no way out for the US except bankruptcy or renegotiation. And renegotiation at the national level is called “inflation”.

The parallel is not Japan in the 1990s. It’s Weimar Germany in the 1930s. We are a debtor nation, not a creditor nation, and if we try to honor every unproductive debt (our parents left us with) while propping up the entire world system that put us in debt, the political consequences are frightening.

Thus the banks are a sideshow.

Way back in September, Paulson framed the debate to his liking and his ploy worked – after 5 months, we’re STILL talking about “unclogging credit”. More the fools are we for letting Henry Paulson set the terms for this debate.

The real argument is whether or not to inflate/devalue.

After that, the next real argument is how we direct national resources, and the role of the state (and markets) in addressing energy, health care, water security, air quality, deforestation, global warming, basic research investment, etc.

I read, as a layman, of “concensus” economist forecasts calling for around a 2% GDP decline this year, up 2% roughly the next. I read the Treasury statement on Friday that all of our largest banks are adequately capitalized for “current conditions”, which are pretty awful. I wonder, then, why the sense of impending financial Armageddon, why the barely concealed panic, why the seeming rush to take over banks?

The problem with the nationalization solution is that it is being presented as a panacea, and the cans of worms it will open up are not discussed.

Why not at least give Geithner’s plan a chance, as Barney Frank suggests?

At present, financial statements of big banks show that they have adequate capital asset ratio, in accordance with accounting requirements. Unless the government and certified public accountants cheated togather, the legal grounds for nationalize the banks are doubtful.

Sweden can nationalize the banks and privatize these banks after restructuring because big international investors and funds do not have significant percentage of investments in these Sweden banks. If they invest, they invest a small percentage, on the understanding that these are high risk investment, expecting high risk premium as Sweden has track record of nationalization of banks, and the high risk of nationalization again whenever there is financial crisis.

If US and UK have habit of nationalization of banks, big investors and investment funds will treat investment in banks as high risk and less percentage of investment may be placed on such bets. Hence, less funds will be allocated for purchase of bank shares. The availability of investment funds to buy and hold large amount of bank shares will be doubtful, and it is possible that there may not be adequate funds for buying shares of large scale US and UK private banks. Investors may also review the traditional view of “In capitalism we trust” for US and UK stock market.

Significant number of investors may not think UK will nationalize big banks, though UK have large shareholdings in RBS and Lloyds because UK has allowed Barclays, Standard Chartered and HSBC to refuse to accept government injection of capital, and allows time and freedom for these banks to raise capital from private investors, based on the needs and records shown in their financial statements.

If investors believe that US can nationalize banks to cause serious damage of investors’ interest based on projected loss/impairment on capital, rather than actual loss based on accounting records, big investors may not be interested to buy and hold significant percentage of stocks of US banks, as banks have risk of being nationalize every ten years, e.g. 1980s Savings and Loan Crisis, 1987 stock crash, Latin American financial crisis 1990s, 2007 financial crisis.

You said: “But these are resourceful and imaginative people, with lots of connections and some big friends to save”

This is exactly why the banks too big to fail must be nationalized or reorganized AND split up. Existing management must be fired to send the banking industry a clear message that rampant speculation and business failure will not be rewarded or tolerated.

The exponential growth of debt in the US financial sector over the last decade played a primary role in getting us where we are today. Rather than a sideshow, financials are taking their proper place: Front and center.

The most clever financial solution in the world will not get us out of this mess. Families, businesses, and all levels of government are overextended. Hedge fund managers, often with questionable motivations, helped drive commodity prices through the roof. Now, the commodity markets lay in ruins, and inventories are at their highest levels in history. Overproduction in the auto and construction industries has led to a period of rising inventories and reduced output, while the entitlement shortfall is coming on like a freight train.

While I agree that legislation and policy can help ease the pain, there is little question in my mind that the world is in for a double aught hangover of epic proportion.

First of all, the big banks are already nationalized. How else to explain that the Congress and Obama are treating their executives like civil servants and second guessing bank policies.

These banks need to be de-nationalized. The way to this is to seize them and restructure their balance sheets.

What I hope Geithner is working on is a quick, orderly and comprehensive way to do this. If we are lucky, the “stress test” is a way to separate the sheep and the goats prior to Judgment Day. If we are not, this is just more dithering while Rome burns down.

We can deal later with the problem of breaking up large banks that are “too big to fail.”

This should not cost the taxpayer a single dime – except for wiping out the equity positions Paulson foolishly took last fall. Small depositors are protected by the feds. Unsecured creditors get equity in the new banks. Perhaps you could give the stockholders a stake in the most toxic assets on the banks’ balance sheets.

These seizures need to be executed simultaneously on every insolvent bank that is too big to fail.

For the long-term we need to encourage as much shadow-banking activity as possible to return to regulated commercial banking. This is very much in the public interest and I think a strong case can be made for exempting regulated commercial banks that are adequately capitalized from corporate income taxes. Our goal should be to discourage the securitization of credit except where particular assets (e.g., 30 fixed mortgages) pose a risk to bank financial integrity.

A basic reading of Adam Smith informs us that government’s most important role in the economy is to prevent the formation of monopolies. It follows that any financial institution that is “too big to fail” is just too damned big, and a threat to the survival of capitalism. Nationalization is a first, necessary step toward splintering the megaliths.

I have suggested that an excellent place to start would be a AIG, which already is substantially nationalized. Split the finance divisions from the general insurance divisions, and take the division that issued all those credit default swaps into bankruptcy. That would force the write-down of a great many derivatives — a mega stress test. Why prop up one zombie merely so it can prop up others?

I would argue the banks are currently ‘conditionally subsidized’. Of course stress tests are urgently needed, as is the valuation and separation of toxic assets; the sooner the better.

The break up of banks deemed too large to fail should not be a high priority, and can wait until the more urgent problems are addressed. However, it is my opinion that simply restructuring balance sheets does nothing to address the issues of arrogant management and financial institutions that value their assets in the trillions.

In the FT article that reported Greenspan’s support of nationalization it said he felt senior debt holders should be spared. Does he mean senior unsecured debt holders? If it is not an FDIC type nationalization why should any unsecured debt holder be spared? They face some of the same decisions when investing that an equity holders do.

When the banks which are found to be prospectively not viable (insolvent or unable to pass the stress test) are taken into receivership,the first order of business (after ensuring continuity of services) is to isolate and analyze balance sheet components tied to financial instruments impaired by association with “hard to value” items, including liabilities tied to asset backed securities, etc.

Once this has been accomplished, that portion of the balance sheet can be split away, and distributed to the (former) bank entity and its stockholders, presumably under new management. It does not stay with the primary, banking, portion of the former bank entity, which continues to hold, for purposes of reorganization and recapitalization, all of the property, operations, and balance sheet of the viable part ot the bank. Once the reorganization is accomplished, the stock of the reorganized banking entity is sold to the public, and the proceeds of the sale are used to cover the costs to the taxpayer of having to engage in this and other financial crisis repairs.

This privatizes (to the stockholders of the former bank entity) any losses associated with the potentially “bad” part of the bank due to hard to value and fraudulently derived pseudo assets.

It returns the good part of the bank, banking operations, to private ownership by sale of those assets to the public, but and socializes the benefits gained by the taxpayers’ having taken and separated the good from the bad.

Nationalization-Lite. That’s what I expect from Geithner and Obama. For nationalization to lead to true deleveraging then there must be a re-structuring of American culture including how we create and use shelter, how we finance education, how we shop. They can’t go that far. Instead they’ll try to keep the Ownership Society propped up like Potemkin’s villages. The reality that instead of a society of owners we have a mass of debtors, peons struggling under mortgages, credit-card debt, hospital bills and student loans, will be hushed up and Walmart will continue to show profit.

Imagine a first world country that recognizes the notion of 100% home ownership as a delusion. A country that vigorously defends the rights of tenants. A country in which national banks compete in the retail banking market, providing solutions that successfully underprice the credit-card industry. A country where the notion of carrying several thousand dollars of debt on your credit card is unheard of. A country that provides a national health system and free higher education.

You are imagining a deleveraged society. There are several of them in Northern and Central Europe.

Thanks somit for the Crisis of Credit link. It would be better if it addressed the regulatory background, for example the reduction in capital requirements.

Wow. A great summary that actually seems to touch the reality of the situation. Kudos. To coin an interwebism, “Messy situation is messy.” While I agree that Geithner’s first moves were not first rate, what strikes me most is the fevered expectations that preceded them. Exactly what was it the market thought he would say or do which would magically make it seem like a good idea to be holding (or even buying!) bank stocks?

There was a time when the expertise of MIT faculty was sought and trusted by our nation’s leaders during times of national stress. These MIT leaders rolled up their sleeves and dove into the problem along with government experts and often a solution was framed, trusted and followed. Now our Sloan professors rant and blog and throw stones from the sidelines. What a great downfall for an Institute with an illustrious past. I’m a Course XVI grad from the 1960’s. I hardly recognize my Institute. If you are not actually in the “game” then your points are no more than brownian motion.

“It is hard to focus the world (and Congress) on forestalling Financial Armageddon when your crack modellers publicly predict something close to a V-shaped recovery near the end of the forecast horizon.”

They are in a trap: If they forecsat an “L” shaped recession (i.e. the most probable outcome), they could make it more likely that their forecast will come true. Plus they’ll get politically hammered for excess negativity.

Forecasts aren’t just forecasts, especially when the Fed does it. Then they’re policy statements.

Does the government know enough about banking to conduct an adequate “stress test”? Recent news indicates that investigators on the Madoff scandal found that Madoff never invested any of the $50 billion over the decade plus that he ran his Ponzi scheme. If the SEC can’t even determine if an investment business is making investments, why should I have any confidence that the federal government is competent enough to conduct a valid stress test of large banks? I seriously doubt that the government has intelligent and sophisticated enough regulators to conduct an effective stress test of the major financial institutions they are bailing out. It seems that one of the conclusions of the melt down must be that the government is either too incompetent to regulate large, financial businesses or too partial due to political contributions, conflicts of interest and/or out-right personal relationships with financial executives to effectively regulate their activity.

Great post, Observer. Why does the government need to run “stress tests”? B of A and C have Tangible Common Equity (Texas) ratios of <2 and Market Cap/Total Asset ratios of <1%. Wall Street has already written them off. The Obama administration’s handling of these two banks will define whether it is truly committed to ‘change’, or if it’s business as usual.

PB…I do not think that is a fair assessment of Prof. J or any of the course XV profs. I’d venture a guess that getting people interested and educated on the crisis is a VERY important task…and if that requires a little bit of ranting–so be it. People are engaged. Students at the Institute are engaged…and guess what? We’ve heard the call to action and are rolling up our sleeves…to do something about it! Join us.

Thanks PB. If MIT’s faculty is worthless then why should a student leverage up $50,000/yr to attend? Answer: she shouldn’t! Nationalize higher education along with the banks! Give your children’s grandchildren the opportunities they deserve.

just heard greenspan say that we will be back in this predicament some time in the future…..he doesn’t know when but said that human nature will always be fueled by greed….it sent chills up my spine…soooo true….human behavior will not change but can be manipulated to forge ahead….

The results of the procedure they outline are that:
“The adoption of the proposed good- and bad-bank separation would result in capital losses for the shareholders and bondholders, because the new policy would eliminate the benefit that they might receive from further bailout money from the government. The potential reorganization of the bad bank made necessary by future insolvency would not create any kind of financial emergency, so there would be no reason for the government to bail out the bad bank. There is no reason not to inflict the capital losses on the shareholders and bondholders, as they represent the capitalization of possible bad policies and are unrelated to the assets that the shareholders and bondholders actually own.”

I like it. It relieves the taxpayer of further obligation, and places risk associated with the questionable assets where it belongs.

I am new to this Blog and looking forward to absorbing what you have put up. I am a MIT Graduate (B. Arch. 69) with some urban and housing economics taken in the MCP program at Penn.

In that regard I became familiar with the insurance strategy that was used quite effectively in the housing market for many years to create assets capable of being bought and sold because their value was insured. Can someone comment on why the insurance approach has not been proposed in the current crisis? See my comment on it below to Bill Grigsby — housing economist in late September. Thanks to anyone who cares to respond.

From G. Claflen to W. G. Grigsby in September:

Here’s a question regarding the bailout proposals that are floating around.

Why not an insurance approach rather than an investment approach?

The federal government seems to have a better record as insurer of last resort than as investor of last resort. HUD insurance seemed to work fairly well.

Here is the idea. — the Federal Government would capitalize and set up an insurance function (or since we just bought AIG maybe they could do it). Insurance would be optional. The trashy assets would remain in the hands of their ill-advised owners. If these owners wanted to enhance their assets, they could buy insurance which would cover the gap in value between what they are worth and what they want them to be worth. Initially the insurance premiums might have to be below the proper level for the true risk, but that could work out over time if the assets gradually increased in value. If the insurance premiums were set adequately to generate some income in this entity, some or all of the surplus could be used to buy impaired assets which would create a market for them and gradually increase their value which would have the effect of reducing the need for the insurance. Would this make any sense?